Fed still on track for rate hike this year, Yellen says

Federal Reserve Chair Janet Yellen said on Thursday she expects the U.S. central bank to begin raising interest rates later this year as long as inflation remains stable and the U.S. economy is strong enough to boost employment.

Yellen, who spoke a week after the Fed delayed a long-anticipated rate hike, said she and other Fed policymakers do not expect recent global economic and financial market developments to significantly affect the central bank’s policy.

That message, along with Yellen’s contention that recent inflationary weakness is likely transitory, may come as a surprise to some investors who took last week’s decision as a sign that a policy tightening was no longer imminent and would likely come next year.

Much of the recent price weakness is due to special factors such as a strong dollar and low oil prices, which are likely to fade, Yellen said, allowing U.S. inflation to rise to a 2-percent goal over the next few years.

She and the policy-making Federal Open Market Committee (FOMC) expect the world’s largest economy to be strong enough to achieve maximum employment and to keep expectations for prices stable, she said.

“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen told hundreds of students and local residents at the University of Massachusetts, Amherst.

As it stands, she said, U.S. economic prospects “generally appear solid.”

The Fed’s decision to hold off raising rates for the first time in nearly a decade was somewhat expected, given a recent selloff in global financial markets that was sparked by fears that China’s economy is weaker than expected.

But investors reacted to Yellen’s cautious tone last week by complaining of mixed messages and pushing expectations of a rate hike out to March of next year, from December previously, based on futures markets.

Yellen, however, said it was best not to delay “too long” what should be a “quite gradual” pace of future rate hikes. “The more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.”

The Fed’s preferred inflation measure, the personal consumption expenditures, should rise to 1.5 percent or higher next year, from 1.2 percent now, “barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further,” she said.

The Fed chair cautioned that inflation may rise more slowly or rapidly than anticipated. “Should such a development occur, we would need to adjust the stance of policy in response.”